Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
On Wednesday, the NYSE filed a second amendment to its proposed corporate governance listing standards with the SEC. The NYSE had made its original filing last August and filed the first amendment back in April. The current amendment (which reflects the Exchange’s response to 64 comment letters from the public as well as from the SEC) is expected to be the NYSE’s final filing with the SEC – as the NYSE sent an email to issuers indicating that the SEC might approve these standards as early as next week.
Markets Appear to Appreciate Director Independence
The executive search firm Christian & Timbers recently released results of a study it did on 15 large public companies that had each elected new, independent directors to their boards. That study found that the value of the company’s stocks rose at an annualized rate of 91.5% during the period beginning with the election of the new directors.
Analysis of Shareholder Access Proposal
As the community knows, the SEC’s new proxy access rules will hinge on a couple of triggering events — one of which will be the receipt of 35% or more “withhold” votes for any given director or directors. (For a good recap of the rules based on the little we’ve gotten from the press release and the open meeting, see Mike O’Sullivan’s blog summarizing the proposal. We’re still hoping to see the SEC’s release later today.)
Floyd Norris reported in the New York Times yesterday that Calpers will be withholding its votes from members of any audit committee who vote to allow the company’s independent auditor to perform any tax advisory services. This is really not anything new as CalPERS had announced this policy during the past proxy season – and actually might withhold votes if an independent auditor provides any type of non-audit services this season.
At the Annual ACCA Conference, I just came off a panel with Paula Dubberly, Corp Fin’s Associate Director – Legal, who announced that she (and other members of the staff) just completed discussions with the Department of Justice – as well as members of the President’s Corporate Fraud Task Force – and they have jointly concluded that Section 906 of Sarbanes-Oxley does not apply to 8-Ks, 6-Ks and 11-Ks.
Of course, this would have been more welcome news back in June when most plans were filing their 11-Ks – but Senator Biden’s unexpected remarks on the topics put considerable pressure on the SEC staff to not take a position at that time. So those plans that filed the 906 certification in June seemingly are stuck with a cert in that filing – but can rest easy with the knowledge that the DOJ doesn’t believe that 906 applies. And don’t file the 906 cert next year…
Although the SEC has not yet issued a rulemaking release (expected Friday) – but there is a press release – about its meeting this morning, the Commission did vote unanimously to propose rules allowing for shareholder access to corporate proxies. At the meeting today, Commissioner Harvey Goldschmid raised the question — addressed in summary fashion by the SEC’s General Counsel — of the Commission’s authority to regulate in this area. Commissioner Paul Atkins also appeared highly engaged with this issue. The SEC seems to be expecting a legal challenge on authority grounds to any access proposal it adopts, and we look forward to more on this angle of the rulemaking.
The SEC has put the proposal out for a 60-day comment period (following its official publication in the Federal Register).
Ethical Accountants
With the PCAOB, among others, continuing to spotlight the importance of accountants’ professional standards, at least one state has also stepped in to make it clear that the stakes have indeed been raised. The New York State Society of Certified Public Accountants announced on September 25 that it has adopted a bylaw amendment that requires its professional ethics committee (PEC) to share ethics violations with state and federal regulatory authorities. The PEC may even inform regulatory authorities about its investigations before a final determination is made about the alleged ethics violations. The new bylaw also requires the PEC to turn over all statements and other materials relating to the investigation, or copies thereof, requested by the regulatory authorities. New York is the first state society to adopt such an extensive referral process.
EC Adopts International Accounting Standards
On September 29, the European Commission adopted a regulation endorsing International Accounting Standards (IASs), including related interpretations, thereby confirming their compulsory use starting in 2005 under the terms of the general IAS Regulation adopted by the European Parliament and the Council in 2002. The regulation requires listed companies, including banks and insurance companies, to prepare their consolidated accounts in accordance with International Accounting Standards from 2005 onwards.
PCAOB Likely to Rebuff European Plea for Auditor Equality
As reported in the Financial Times today, Chairman William McDonough of the PCAOB is meeting next week with representatives from the European Union. McDonough has indicated that the PCAOB is unlikely to stand down on inspections of European audit firms in the near term. Chairman McDonough also indicated to the FT that the PCAOB was planning to review the independence implications raised by accountants providing tax services to their audit clients, although the Board has not set any specific time table for that review.
Although the proposed attestation standards are not yet posted, the PCAOB has posted a briefing paper. Here are my ten cents on the proposed standards:
– Overall, the bulk of the proposed attestation standards were not a surprise, particularly the PCAOB’s “one-size-does-not-fit-all” philosophy.
– However, the devil is in the details of a bevy of novel definitions. In the proposal, the most critical definitions are that of “significant deficiency” (if it results in more than a remote likelihood of a misstatement of the company’s annual or interim financial statements that is more than inconsequential in amount) and “material weakness” (if, by itself or in combination with other internal control deficiencies, it results in more than a remote likelihood of a material misstatement in the company’s annual or interim financial statements). Hopefully, the proposing release will clarify terms such as “more than remote” and “inconsequential.”
– From the issuers’ perspective, the proposal would allow companies to be able to rely on others, which is a positive development – but the discretion given to auditors as to how much documentation is considered adequate might be considered a negative one from the corporate viewpoint (ie. more expensive).
– The concept of mandatory “walk-throughs” arguably brings the involvement of auditors to new heights. A “walk-through” is when auditors kick the tires to ensure that the controls actually were implemented and operate as they were designed to operate.
– The bottom line is how will auditors “evaluate the results and form an opinion” when they consider whether a particular deficiency is “significant” or “material.” Considering the fact that the Big 4 still are being sued for the misdeeds of their clients (for which they bear some responsibility, of course), they likely will remain quite conservative – which could result in a long road to hoe for companies.
Okay, I am back to the Annual ACCA Conference and I will let Kimberley take it from here…
At its public meeting in Washington this morning, the PCAOB proposed its first substantive standard — the auditing and related professional practice standard for the attestation to Management’s Assessment of Internal Control over Financial Reporting. Section 404 of SOX, along with Section 103, directed the PCAOB to establish these professional standards.
The PCAOB’s chief auditor, Douglas Carmichael, explained that under the proposed standard, the auditor must evaluate both management’s assessment and conclusion and the internal controls themselves in order to provide its report with the required level of assurance. As part of that, audit committees should expect to have their own performances scrutinized and evaluated. An ineffective audit committee could itself be a failure of internal controls. The PCAOB expects to receive extensive comments on this last element of its proposal.
To satisfy the PCAOB, the audit of internal controls must be integrated with the audit of the financial statements. Note that while the PCAOB isn’t yet proposing to change the auditor independence rules generally, the PCAOB’s proposed standards would evidently prohibit the auditor from accepting an internal control engagement (for non-audit services) that has not been specifically (as opposed to categorically) pre-approved by the audit committee.
The PCAOB also adopted rules relating to its inspections of registered public accounting firms and proposed a rule defining some terms used in its professional practice standards.
More Details About Tomorrow’s SEC Open Meeting Leaked
Not to be outdone by the PCAOB, the SEC is set to have an open meeting tomorrow (at 9:30 a.m.) to take up its own significant and undoubtedly contentious topic – whether to propose rules that would require companies, under certain circumstances, to include security holder nominees for director in the company’s proxy materials.
Unlike the typical secrecy surrounding most proposals, the details of tomorrow’s proposal have been gradually leaked. The Washington Post reports today that the proposed framework will be triggered if either:
– a group representing at least 1 percent of a company’s investors puts a proposal on the proxy ballot requesting that a shareholder nominee or nominees be added to the ballot the following year. The proposal would need the approval of more than 50 percent of shareholders to win; or
– 35 percent of shareholders withhold their votes for a director or slate of directors, triggering a provision giving investors the right to try to get nominees on the next year’s ballot.
Once triggered, investors would have to win backing from 5% of shareholders to submit nominations. Shareholders would be allowed to propose one name for smaller boards and as many as three for larger ones. Nominees would have to get more than 50% of the vote to win.
Inside Scoop on Serving as a Director
For TheCorporateCounsel.net subscribers, we have posted a very interesting interview with Jim Ukropina on Serving as a Director. Jim, who sits on several Fortune 500 boards, provides his unique insights into a variety of topics, including the upcoming shareholder access proposal.
The upcoming issue of The Corporate Counsel will discuss the SEC’s new enforcement settlement policy, that I blogged about back on August 5th. With regard to D&O insurance, this new SEC policy is very significant as it has an impact on the application of the various forms of the so-called intentional misconduct or dishonesty exclusion that exists in many policies. Specifically, if the exclusion requires only that the misconduct be established “in fact”, coverage in any ensuing civil litigation may well be precluded by the consent injunction entered in the SEC proceeding.
For TheCorporateCounsel.net subscribers, we have launched a new “D&O Insurance Portal,” which includes sample underwriting questions that you can ask your insurer (courtesy of Patricia Villareal of Jones Day).
PCAOB = P-COB?
The answer to last week’s trivia question – what nickname for the PCAOB is Chairman McDonough pushing for – is “P-COB.”
Chairman McDonough urged the use of this nickname during his Senate testimony last week. Although the Chairman himself has been guilty of using “Peek-a-boo,” it is now well known that the PCAOB strongly dislikes that nickname. I don’t know about you, but I just get a feeling that P-COB will fail to attract followers…why not try something simple, like “Oversight Board”…
Evelyn Davis – Looking Her Best
Yesterday’s NY Times contains a brief article about how a photo of Dick Grasso graces the cover of Evelyn’s upcoming annual booklet (typically, $525 per copy, minimum order of two). Evelyn had chosen that photo before the recent controversy over Dick’s compensation – but she is happy to keep the photo because “the most important thing is that it’s a great picture of me.” For those that aren’t familiar with Evelyn, that says it all.
On GreatGovernance.com, we have posted an amusing interview with Evelyn from the Washington Post that ran in the spring.
Yesterday, a group of pension plans held a press conference to object to the SEC’s director nomination proposal – the one that is supposed to be voted on by the Commission next Wednesday!
As reported today by the New York Times, the SEC’s proposal will involve a two-year process. In the first year, a triggering event – such as a sizable percentage of shareholders that abstain or withhold votes for nominees – would have to occur. In the second year, a contested election could take place, with candidates selected by the board running against shareholder candidates (one to three candidates depending on the board’s size). The shareholder candidates would have to certify that they have no conflicts of interest nor financial relationship/special ties to the investors that nominated them.
The pension plan press conference comes a few days after the Business Roundtable sent a letter to the SEC urging that the Commission study the related issues further before it takes action.
My initial reaction to this extraordinary level of pre-proposal activity is that institutional investors truly are getting their act together. Undoubtably, this exercise in lobbying the SEC will strengthen their relationships and communication channels – so that when it comes time to act as a group to meet any ownership thresholds imposed by this rulemaking, it will not be as difficult to accomplish as it might have been a year ago.
Meanwhile, from the company perspective, it will be difficult for management to get its act together to impact this rulemaking. Aside from the ASCS, ABA and BRT, many of the other associations whose members are impacted by this rulemaking think of lobbying the SEC as a sideline; not a primary mission. Another factor is that this rulemaking most directly impacts CEOs and directors; not CFOs, controllers and lawyers (which are the professions more accustomed to lobbying the SEC). CEOs tend to lobby in groups broken out by industry – and directors normally do not lobby in their roles as directors (as being a director typically is not a primary job).
Convertible Debt Offerings – “Happy Meals” and More
For TheCorporateCounsel.net subscribers, we have posted the transcript for last week’s “New Twists in Convertible Debt Offerings.” Personally, I learned a lot, including why a convert offering coupled with an issuer’s repurchase program is called a “Happy Meal” (answer – everyone goes home happy).
A lot has been reported over PCAOB Board Member Charles Niemeier’s comments that the PCAOB will closely scrutinze any instances of a company changing auditors, as I blogged about on September 23rd.
At the PLI’s Directors Institute, the question was raised whether threatening to fire an auditor for the next year over a legitimate disagreement over the current year’s accounting would be “coercion” prohibited by the new auditor influence rules. Commissioner Goldschmid was the only panelist who ventured an opinion on this, stating that these facts would not support a finding of coercion. Thanks to Nathan Dooley of Baker McKenzie.
PCAOB Adopts Investigations, Adjudication and Registration Withdrawal Rules
On Monday, I asked the trivia question about which company rang the last bell with Dick. Shinhan Financial Group Co., Ltd. was the last to ring any bell with Dick, they rang the opening bell on September 16th. Sabre Holdings was the last listed company to ring the closing bell.
By the way, Christian & Timbers is conducting an online poll on “What do you think Dick Grasso will do next?” So far, writing a book is leading with 48%; becoming a CEO has 15%; consultant on regulatory issues has 13% and cable market analyst lags at 8% (heading another stock exchange has 2%).
As reported today by the NY Times, SEC officials noted after Chairman Donaldson’s Senate testimony on NYSE governance that the shareholder access rules will be considered next Wednesday, October 8th at an open meeting.
However, the Times incorrectly reported that the SEC would be approving these rules – hopefully, that was not the tone of the SEC officials! They have to be proposed and subject to public comment first.
October Eminders is Up – So is the “2004 Proxy Season Resource Center”!
For subscribers of TheCorporateCounsel.net, the 2004 Proxy Season Resource Center includes new activities for you to consider during this proxy season, either as required by law or as a matter of prudence.
There is ample commentary, analysis, sample disclosures and sample documents. For example, courtesy of John Newell of Goodwin Procter, we have posted a comprehensive “Time & Responsibility Schedule for Accelerated Filers.” We will be continuously adding new content as the proxy season wears on.
